Gold - A Safe Haven From Collapse, But Not Much Else

17/04/2013 11:35 BST
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Updated
15/06/2013 10:12 BST

Trying conditions bring out the fundamentalist in people and financial shocks are certainly no different. We regularly hear about survivalists stocking up on tinned goods, rifles and ammunition and heading to the hills to wait out the coming apocalypse. If there was a financial equivalent they would be what we call 'goldbugs' - believers that the precious yellow metal is the only asset out there that is a true representative of real wealth.

For them, the world of 'fiat' currency - money backed by the full faith and credit of a government and/or central bank who issues that currency under 'fiat' - is doomed to fail. Gold and its inherent tangibility will be the currency to survive through the flaming ashes. The limited supply of gold is central to their belief system.

Of course, it's fair to say that gold has played a central role in global economy for a long time. Before the 19th century factors like exchange rates were not as much of an issue as they are today. Devaluation of currency did occur, but mainly via reducing the amount of gold and silver used within the actual tokens of money in the economy.

With the advent of global trade, exchange rates became more relevant leading up to the big crash in 1929. Countries devalued their currencies within quick succession of each other in order to try and gain an advantage, but it was a false process and following collapse the world moved into the Bretton Wood's system of semi-fixed rates until the 1970s, with the aim being to prevent this kind of thing from happening again.

Participants also agreed to fix their exchange rates by tying their respective currencies to the US dollar, keeping a range around that peg of 1% to maintain stability. Separately, the US dollar was also pegged to the price of gold at $35 per ounce to try and give the dollar credibility.

It all amounted to what John Maynard Keynes, the main architect behind the Bretton Woods system, referred to as the complete opposite of the Gold Standard which had dominated international trade before the Great Depression and war that followed. But that is history now.

Over the past two trading sessions we have seen gold lose around 11% of its value as investors have been dumping this supposed 'haven' of wealth. They're doing this for one reason, and it is not because the world's economy is all fixed and the need for security is therefore at an end. The key is yield or gold's lack thereof.

Investors are looking for a return and, with global interest rates so low, the search for yield has become more difficult. The best performing sovereign bonds over the past few months have been those in the European periphery that pay a decent yield, the best performing stocks are ones that pay a decent dividend and the top currencies come in with interest rates of between 2.5 and 5%.

Gold offers no yield. There is no reward for holding it other than the smug feeling that you are protected from any potential economic Armageddon that's on the horizon. If you believe that's on the cards, then go right ahead and back up the truck and load up on the yellow metal until you're heart's content. Otherwise, you're best to leave it well alone.